working capital management policy and the financial

75

International Business and Accounting Research Journal

Volume 2, Issue 2, July 2018, 75-86

http://ibarj.com

Working Capital Management Policy and The Financial Performance of

Food and Beverages Companies in Nigeria

Yusuf Yahaya1, Mohammed Sani2

DOI: http://dx.doi.org/10.15294/ibarj.v2i2.40

1Department of Accounting, Usmanu Danfodiyo University Sokoto, Nigeria 2Department of Entrepreneurship Education, College of Agriculture Zuru, Kebbi State, Nigeria

Info Articles

____________________ History Articles:

Received 1 January 2018

Accepted 15 March 2018

Published 8 July 2018

____________________ Keywords:

Working capital

management, profitability,

receivable collection period

(RCP) policy, inventory

conversion period (ICP)

policy and return on Asset

(ROA).

________________________

Abstract

___________________________________________________________________

This study is set to examine the relationship between working capital management policy and

profitability of quoted food and beverages companies in Nigeria. The population comprises a

sample of ten (10) food and beverage companies quoted on the Nigerian Stock Exchange. The

study used secondary data for a period of ten (10) years (2005-2014) and was analyzed using

descriptive and inferential statistics with the aid of Stata version 13. Two research hypotheses were

formulated and tested. It was found that, there is no significant relationship between receivable

collection period (RCP) policy and profitability of quoted food and beverage companies in Nigeria.

However, it was recommended that the management should identify the level of inventory which

allows for uninterrupted production but reduces the investment in raw materials and minimizes

reordering cost and hence increases profitability. The management should reduce their RCP from

53 days on the average to at most 30 days by instituting adequate control and flexible credit policy.

Address Correspondence:

E-mail: [email protected]

p-ISSN 2550-0368

e-ISSN 2549-0303

Yusuf Yahaya et al. / International Business and Accounting Research Journal 2 (2) (2018)

76

INTRODUCTION

Working capital management refers to all

aspects of administration of investment in current

assets and all the sources of financing current assets

aimed at justifying a balance between the returns

and liquidity risk (Pandey, 2007). It is a cardinal

part of the overall corporate strategy of wealth

maximization. It constitutes business investment in

short-term assets that changes severally within one

accounting period and requires serious attention

and planning from the management of a business

entity. Working capital management has three basic

forms; aggressive policy, conservative policy and

average policy.

The continued existence, survival, growth

and stability of most corporate bodies are highly

dependent on the efficiency and effectiveness of its

management. This could be measured by the

management’s ability to combine all the necessary

materials for optimal and efficient actualization of

the set objectives within the organization at a

stipulated time. In any organization, cash is one of

the nerve center, which determines to a large-

extent, the growth, and survival among other

competing firms. As a result, it becomes paramount

for any management to give proper attention to the

effective planning of its working capital in order to

withstand any form of global competitive challenge.

The management decides the best proportion of its

investment on both fixed and current assets and

finally the firm’s liability level to enable

improvement and correction of any possible

imbalances in the liquidity position of the firm.

Working capital management is an

important tool in financial management this is so,

because most of the financial managers spend a

great deal of their time on working capital

management decisions (Brigham & Houston,

2003). According to Ali (2011), Proper working

capital management improves firms’ profitability

and liquidity position, and thus increasing the

market value of the firm .Working capital

management refers to all management decisions

and actions that influence the size and effectiveness

of the working capital (Kaura, 2010). It is a

managerial accounting strategy which focuses on

maintaining efficient levels of current assets and

current liabilities which ensures that a firm has

sufficient cash flow in order to meet its short-term

obligations. Working capital management is an

essential part of financial management and

contributes significantly to a firm’s wealth creation

as it directly influence organizational profitability

(Naser, 2013).

The most important issue in working capital

management is the maintenance of liquidity in the

day-to-day operations of the firm. This is crucial so

as to prevent creditors and suppliers whose claims

are due in the short-term from exerting

unwarranted pressure on management and thus

ensure the smooth running of the firm. This

emphasizes that, the main objective of Working

capital management is to ensure the maintenance of

satisfactory level of working capital in a way that

will prevent excessive or inadequate availability of

working capital (Filbeck and Krueger, 2005). It is

equally important for us to note that inefficient

working capital management may not only reduce

profitability but also lead to financial crises and its

resultant effects. In addition, sound working capital

management ensures that organizations have the

ability to meet their short-term liabilities adequately

as at when due.

Food and beverage industries are increasing

in Nigeria, yet the level of failure in their services

indicate that lack of effective and efficient

management of working capital components

(Receivables, Payables, Cash, Inventory and

Liquidity) seems to be more pronounced. Some of

the food and beverage companies that are still in

business and listed on the Nigerian Stock Exchange

(NSE) find it difficult to pay dividend to their

shareholders. Notable examples include Champion

Breweries, which has not paid dividend since 1988

and Golden Breweries since 1997 (Salaudeen,

2001). As a result, some Nigerian workers were

forcefully disengaged from their services. These

actually add to the unemployment figures and other

social vices which Nigeria is currently facing.

Despite the above scenario, companies post huge

figures in respect to receivables, payables,

inventory, cash and liquidity.

According to Stephen (2012), documents

have evidenced that most of the business

organizations do not hold the right amount of

inventory, receivables, cash and liquidity position;

as a result, the companies are unable to meet their


77

maturing short term obligations and their

operational needs. Also, insufficient management

of these components of working capital means that

a firm is unable to undertake expansion project and

increase its sales, hence limiting the growth and

performance of the business. Rahman &Nasr (2007)

are of the opinion that the management of working

capital directly affects liquidity and organizational

profitability. Akinsulire (2005) postulates that “no

matter the amount spent on equipment and

machinery, building and so on, if the ingredients

required for production are not efficiently managed,

the entire amount committed to the project will

become a waste”. This opinion suggests that

managing the working capital components is so

vital to the financial wellbeing of any organization

in order to ensure sustainability and the overall

organizational profitability. It is as a result of the

above problem that the researcher deemed it

necessary to embark on this study; in order to assess

the impact of working capital management and

profitability of the listed food and beverage

companies in Nigeria.

Researchers such as Deloof (2003), Padachi

(2006) Mehta (2009) Samiloglu and Demirgunes

(2008) had carried out researches on working

capital management on the financial performance

of firms in other countries. Their findings however,

reveal that there is a significant relationship

between working capital management policies such

as inventories period, accounts payable period, cash

conversion cycle and accounts payable period and

financial performance of firms.

Abubakar (2012), in his studies on Working

Capital Management and firms’ performance of

selected companies in the pharmaceutical firms and

twelve (12) manufacturing companies in Nigeria

over the period of five (5) years and within the

frame of the studies reviewed respectively. This

study, working capital management and


companies in Nigeria, covered a period of ten (10)

years, thus suggesting a huge gap for this study to

bridge.

Therefore, this study intends to bridge the

aforementioned gaps in the literature. The study

will serve as an update to the previous work by

employing large sample size, reviewing recent and

relevant literature, extending the study period for

which data is available and by conducting various

econometric test and treatment for data. It is

against this background that, this study intends to

assess the impact of working capital management

on profitability of food and beverage companies in

Nigeria. But more specifically, the study intends to

achieve the following objectives; i. Assess the

relationship between receivable collection period

(RCP) policy and profitability of the listed food and

beverage companies in Nigeria; ii. Determine the

relationship between inventory conversion period

(ICP) policy and profitability of the listed food and

beverage companies in Nigeria.

In a studies carried out by (Egbide, 2009;

Falope and Ajilore, 2009; Raheman et. al., 2010;

Mathuva, 2010), it was found that negative

relationship exists between Debtor’s collection

period and profitability. On the contrary, the

studies conducted by (Akinlo, 2011; and Uremadu

et al., 2012) revealed that debtors collection period

has positive relationship with profitability.

Therefore, it is inferred from the above that the

early the receivables are collected, the better for the

company because early collection of debts would

make cash available and in turn increase turnovers

and this will eventually increase the profit, provided

operating expenses are properly controlled.

However, in a developing economy like

Nigeria where there is difficulty in accessing

finance, firms may have to increase the average

days in which debts are collected in order to retain

their customers and keep them loyal. This may be

one of the reasons why (Akinlo, 2011; and

Uremadu et al., 2012) found a positive relationship

between Debtors collection period and profitability.

The danger in having long debtors’ collection

period is that it leads to high bad debts. As much as

possible, high bad debts should not be allowed in

the management of working capital management

because it may lead to liquidity problems which

may lead to the total collapse of the business.

It was found out in the works of (Mathuva,

2010; Akinlo, 2011; and Uremadu et al., 2012) that

there is a positive relationship between inventory

conversion period and profitability. On the other

hand, the works of (Egbide, 2009; Falope and

Ajilore, 2009; Raheman et al., 2010; and Huynh

and Jyh-tay, 2010) found that there is a negative

relationship between inventory conversion period


78

and profitability. However, in the work of Amarji et

al. (2010) it was concluded that number of days

inventory is held has no significant relationship

with profitability. Inventory in manufacturing firms

is inevitable, and it must be properly managed. The

number of days it takes a firm to turnover its stocks

is germane to its success. Ideally, the shorter a

firm’s inventory conversion period, the more profit

the firm makes because short inventory conversion

period will lead to high turnover which will

eventually lead to high profit. In a firm where there

is positive relationship between inventory

conversion period and profitability, there is

possibility of having idle stock which will

eventually have negative effect on the firm’s

profitability.

Akoto, Awunyo-Vitor&Angmor (2013)

analyzed the relationship between working capital

Management practices and profitability of listed

manufacturing firms in Ghana. The study used data

collected from annual reports of all the 13 listed

manufacturing firms in Ghana covering the period

from 2005-2009. Using panel data methodology

and regression analysis, the study found a

significant negative relationship between

Profitability and Accounts Receivable Days.

However, the firms’ Cash Conversion Cycle,

Current Asset Ratio, Size, and Current Asset

Turnover significantly positively influence

profitability. The study suggests that managers can

create value for their shareholders by creating

incentives to reduce their accounts receivable to 30

days. It is further recommended that, enactments of

local laws that protect indigenous firms and restrict

the activities of importers are eminent to promote

increase demand for locally manufactured goods

both in the short and long runs in Ghana.

Rahman and Nasr (2007) studied the effect of

different variables of working capital management

including average collection and inventory days,

cash conversion cycle, and current ratio on the net

operating profitability of 94 listed Pakistani firms.

Using regression analysis and data covering the

period from 1999-2004, the authors find a

significantly negative association between working

capital management variables and profitability of

the firms. The authors further report a significantly

negative relationship between corporate debt and

profitability but a significantly positive association

between size and profitability. The implications of

these findings are that prudent management of

working capital, reasonable levels of debt use and

increase sales are all very crucial in enhancing the

profitability of the modern firm.

Kesseven (2006) examined the trends in

Working Capital Management and its impact on

firms’ performance in Mauritian Small

Manufacturing Firms. According to him, the trend

in working capital needs and profitability of firms

were examined to identify the causes for any

significant differences between the industries. The

dependent variable, return on total assets was used

as a measure of profitability and the relation

between Working Capital Management and

corporate profitability was investigated for a sample

of 58 small manufacturing firms, using panel data

analysis for the period 1998 – 2003. The regression

results show that high investment in inventories and

receivables was associated with lower profitability.

The key variables used in the analysis were

inventories days, accounts receivables days,

accounts payable days and cash conversion cycle. A

strong significant relationship between Working

Capital Management and profitability had been

found in previous empirical work. An analysis of

the liquidity, profitability and operational efficiency

of the five industries showed significant changes

and how best practices in the paper industry have

contributed to performance. The findings also

revealed an increasing trend in the short-term

component of working capital financing.

Similarly, Mathuva (2010) examined the

influence of working capital management

components on corporate profitability of 30 Kenyan

listed firms. Using panel data methodology and

data covering the period from 1993-2008, the study

finds a significantly negative relationship between

accounts collection days and profitability, a

significantly positive association between inventory

conversion period and profitability and a

significantly positive relationship between average

payment days and profitability. The findings of this

study therefore confirm the traditional view of

efficient working capital management and its effects

on profitability.

Deloof (2003), in his study on the

relationship between working capital management

and corporate profitability, used a sample of 1,009


79

large Belgian non-financial firms for the period of

1992-1996 selected randomly. He used correlation

and regression analysis to analyze the secondary

data collected from the sample. The result indicated

that there is a negative relationship between

profitability that was measured by gross operating

income and cash conversion cycle, number of days

of account receivables, inventories. He suggested

that, a manager may increase profitability by

reducing the number of days account receivables

and inventories. Also, according to his analogy, less

profitable firms wait longer to pay theirs.

Lazaridis and Tryfonidis (2006) examined

the relationship between profitability and working

capital management of 131 firms listed on the

Athens Stock Exchange. Using regression

estimation approach and data covering the period

from 2001-2004, the authors find a statistically

significant inverse relationship between

profitability, measured as gross operating profit and

the cash conversion cycle, accounts receivables

days and inventory days. They also observe a

significantly positive association between

profitability and accounts payable days. This study

re-emphasizes that, firms can enhance profitability

by prudently keeping their working capital

management components (accounts receivables,

accounts payables, and inventory) within optimal

levels.

On the contrary, Sharma and Kumar (2011)

found results which significantly depart from the

various international studies conducted in different

markets that Working Capital Management and

profitability is positively correlated in Indian

companies. Their study reveals that inventory of

number of days and number of day’s accounts

payable is negatively correlated with a firm’s

profitability, whereas, number of days accounts

receivables and cash conversion period exhibit a

positive relationship with corporate profitability.

Moreover, Alipour (2011) examined the

relationship between working capital management

and corporate profitability in Iran using a sample of

1063 years observation for companies listed in

Tehran Stock Exchange for a period of 6 years

(2001-2006). Cash conversion cycle was used as a

major tool of measuring working capital

management efficiency. The results indicated that

there is a significant negative relationship between

cash conversion cycle, number of days accounts

receivable and inventory turnover in days and

corporate profitability. And, there is a direct

significant relationship between numbers of days of

accounts payable. The study, therefore, implied that

managers can create value for their shareholders by

decreasing accounts receivable, inventory and cash

conversion cycle.

Similarly, Dong (2010) examined working

capital management effects on firms’ profitability of

listed Vietnamese firms from 2006-2008. The

authors find that,a significantly negative

relationship exists between profitability, measured

as gross operating profit and the components of

cash conversion cycle (inventory days, and

receivable days). Furthermore, the study also

observes a statistically significant positive

association between profitability and accounts

payable days. These findings imply that increasing

firms’ inventory and receivable days lead to a

decreasing profit while significant financial success

can be attained with increased payable days.

Akinlo (2011) conducted a study on “The

Effect of Working Capital on Profitability of Firms

in Nigeria. The result shows that sales growth, cash

conversion cycle, account receivables and inventory

period affect firm positively, while leverage and

account payable affect firm profitability negatively.

In another study of selected firms in Nigerian

shows that firm’s profitability is reduced by

lengthening the number of day’s accounts

receivable, number of days of inventory and

number of days accounts payable. The result shows

that shortening the CCC improves the profitability

of the firm.

Egbide (2009) and Falope and Ajilore (2009)

in their studies on Working Capital Management

and profitability of listed companies in Nigeria,

made a cross sectional survey design of some

quoted companies between 2005 – 2006 and 1995 -

2005. The data were analyzed using the ordinary

least square regression analyses on one hand and

panel data econometrics in a pooled regression on

the other hand; and reveal that “all the components

of Working Capital Management (ICP, DCP, CPP

and CCC) affect profitability at varying levels of

significance with debtor’s collection period having

the highest and significant impact,” which is

negative. Their study also revealed an insignificant


80

variation in the effects of Working Capital

Management between small and large firms and

suggests therefore that, managers can create value

for their shareholders if they can manage their

working capital in more efficient ways by proper

handling of each working capital component and

keeping them at optimal levels as well as reducing

the debtors’ collection period and inventory

conversion period. The findings of Charitou, Elfani

and Lois (2010) and Al – Debi’e (2011) support

these findings but, Charitou et al added that

efficient, utilization of the firm’s resources leads to

increased profitability and reduces volatility which

leads to reduction in default risk and thus improves

the firm’s value. Hence, if the components of cash

conversion cycle are efficiently managed, they will

add value to the firm since they increase the firm’s

profitability.

Ajilore and Falope (2009) conducted a study

on “effect of Working Capital Management on

profitability performance”. Using a sample of 50

Nigerian non-financial firms listed on the Nigerian

stock exchange for the period of 1996-2005. The

sample was selected randomly. They used panel

data econometrics in pooled regression, where time

series and cross-sectional observations were

combined and estimated. They found a significant

negative relationship between net operating

profitability and the Average Collection Period,

Inventory Turnover in days, Average Payment

Period and Cash Conversion Cycle.

Onwumere et. al (2012) investigated the

impact of working capital policies of Nigerian firms

on profitability for the period, 2004-2008. Adopting

the aggressive investment working capital policies

and aggressive financing policies as independent

variables and return on assets as dependent variable

and controlling for size and leverage, the study

revealed that aggressive investment working capital

policies of Nigerian firms have a positive significant

impact on profitability while aggressive financing

policies have a positive non-significant impact on

profitability. The findings from this study indicate

that firms pursuing aggressive investment working

capital policy will become risky in the long-run

because as profitability increases; the firm grows

and the amount of outsiders’ contributions also

increases. The result also indicates that as the firm

grows and outsiders’ contribution increases; the use

of aggressive financing working capital policy

decreases the profitability of the firm. Appropriate

management of working capital is therefore

essential if the firms are to achieve their objective of

improved profitability and value creation for

shareholders.

From the above review therefore, we can

conclude that there are many issues arising from the

results relating to Working Capital Management,

liquidity and profitability across the globe. Some of

the findings show that there is a positive

relationship between Working Capital

Management and profitability while others shows a

negative relationship with profitability. It is in line

with this that this study intends to find out the

reasons behind these fluctuations in terms of

findings and also to see its applicability in Nigeria,

considering the various challenges in the Nigerian

economy in terms of global/financial crises,

inflation, insecurity, the economic recession, over

dependence on oil and nonchalant attitudes

towards the manufacturing sub- sector of the

economy, among others.

METHODS

Given the objectives and the nature of the

problem, panel and correlation research design are

deemed more appropriate for the study. This is due

to the fact that all the data were collected from ten

(10) years financial statements of the sampled

companies and the relationship between dependent

variable (ROA) and independent variables (RCP,

and ICP,) established in selected firms in the food

and beverage companies sub-sector in Nigeria .The

selection of panel research design is due to the fact

that the variables that were measured are

longitudinal in form and cut across various firms

within the food and beverage companies listed on

the NSE. The correlation design is used to examine

the relationship between all the variables under

consideration. The reason for the selection of

correlation research design in this study is informed

by the fact that, the purpose of the design is to

investigate the relationship between variables and

to establish the impact of one variable (independent

variable) on another (dependent variable), so as to

establish a causal relationship or otherwise among

the variables. This is in line with the objectives of


81

the study. Data was collected on yearly basis per

firm and tabulated, arranged and processed in such

a way that the relationships between dependent and

independent variables could be reached so as to

make inferences.

The population of this study comprises all

the food and beverage companies listed on the

Nigerian Stock Exchange, covering a period of 10

years (2005 - 2014). The period was selected in

order to meet up with the criteria set for this study

and also to add on what other researchers have

done in the field of working capital management.

However, there were twenty eight (28) of them that

were listed; thus, two hundred and eighty (280)

annual reports were provided. The twenty eight

(28) companies were determined from the list of

food and beverage companies listed on the Nigeria

Stock Exchange fact book as per 2010/2011 and

2012/2013. As at the time of conducting this

research, the financial statements of 2015 and 2016

were not available. The choice of quoted companies

is due to the availability and quality of data

considering the fact that all publicly listed

companies are statutorily required to submit

periodical data to the NSE as well as published

audited annual reports and accounts.

In the course of this research work, it was not

feasible to study the whole population. Some

elements of the population were therefore selected

as representatives and thus constituted the sample.

For the purpose of this study, the sample size was

made up of ten (10) companies out of the total of

twenty eight (28) companies listed on the Nigeria

Stock Exchange (NSE) fact book as per 2010/2011

and 2012/2013 irrespective of their location. The

sample size was supposed to be 100% of the

population but some the companies having missing

or no financial reports were removed, those delisted

before 2014 and those listed after 2005 were not

captured.

Based on the aforementioned criteria, only

10 food and beverage companies listed on the NSE

qualified to be the sample of this study. This sample

was drawn using judgmental sampling technique as

a means of meeting the criteria set for the

companies that were studied in terms of getting the

required data for the study. The breakdowns of the

sampling technique are as follows: The numbers of

companies having missing or no financial reports

are seven (7). The number of delisted companies

before 2014 are five (5) while those listed after

2005 are six (6).Therefore, the total number of

companies with missing or no financial reports,

delisted before 2014 and listed after 2005 are

eighteen (18) in number, respectively. This can be

represented in a simple mathematical format as

below; hence the sample size was therefore gotten

as:

n = TC - (CNF + C2014-t + C2005+t)

Where:

n = Sample Size

TC = Total number of companies listed

on the NSE fact book (as per 2010/2011 and

2012/2013).

CNF = total number of companies with

missing or no financial reports

C2014-t = total number of companies delisted before

2014

C2005+t = total number of companies listed

after 2005.

Therefore,

n = 28 - (7 + 5 + 6) = 28 – 18 = 10

Sources and Method of Data Collection

The study used secondary data from

secondary sources, which were gotten from

financial statements of all the sampled companies

of the study for the period often (10) years (2005 –

2014). The use of secondary data in this study is

informed by the fact that the study is based on a

quantitative research methodology that requires

quantitative data to test the research hypothesis.

The data of the study have been collected from

secondary sources only (audited financial reports of

the 10 sampled companies). In this study, return on

asset (ROA) is used as a measure of profitability

while the independent variables used to proxy

working capital management include receivable

collection period (RCP), and inventory conversion

period (ICP) .The various data were sourced based

on the variables used in this study.

Data Analysis Techniques

This study used descriptive statistics and

econometric technique of panel data analysis. The

results are divided into two to actually capture this

classification. The descriptive analysis covers the

mean, maximum, minimum, standard deviation, to


82

evaluate the variables used in the study. Multiple

RegressionAnalysis takes in the form of Fixed

Effects Model (FEM), Random Effects Model

(REM) and Ordinary least Squares (OLS) Model to

establish the most appropriate regression that is

most suitable for the data used in this study.

Appropriate tests such as normality test were

conducted in order to know whether the data

follows a normal probability distribution in order to

apply the appropriate test for the data. Also,

Hausman Specification Test was conducted to

choose between Fixed Effect (FE) Model and

Random Effect (RE) Model. Balanced panel data is

used in this study. The study used Random Effects

Model to assess the impact of working capital

management on profitability using return on asset

(ROA) as dependent variable. The independent

variables are: receivable collection period (RCP)

and inventory conversion period (ICP) .While,

firm’s Size and firm’s Growth are used as control

variables to actually augment the model in the

study. The analysis was conducted using Stata

version 13.

Model Specification

The model used return on asset (ROA) as

dependent variable, two (2) independent variables,

which include: receivable collection period (RCP)

and inventory conversion period (ICP) while

firm’s size and firm’s growth are used as control

variables to augment the model. The model below

is used to critically assess the impact of working

capital management on profitability of the listed

food and beverage companies in Nigeria.

𝑅𝑂𝐴𝑖 = 𝛼𝑖 +𝐵𝑖1RCPi + Bi2ICPi + Bi3Sizei +

Bi4Growthi+li

Where: ROAi = Return on Asset

RCPi = Receivable Collection Period

ICPi = Inventory Conversion Period

Sizei = Firm Size

Growthi = Firm Growth (in sales)

Li = Residual Term

αi = Constant

Bi1-4 = Coefficient of independent

Variables 1 through 4

Variables Measurement

To assess the impact of working capital

management on profitability of the listed food and

beverage companies in Nigeria, return on asset

(ROA) has been considered as the dependent

variable of the study. The explanatory variables

used as proxies of working capital management are

(i) receivable collection period (RCP) (ii) and

inventory conversion period (ICP).While firm’s size

and firm’s growth were used as control variables to

augment the model in the study. The dependent

and independent variables are measured as follows:

Return on Asset (ROA):The return on

assets measures the return on total assets after

interest and taxes. It could also be viewed as a

measure of firm’s ability to employ its assets to

generate earnings. The return on assets is the

component of operating efficiency (Wild, 2000) and

could be measure in any of the two ways: Earnings

before interest and tax expense to total assets(

EBIT/TA). Profit after tax (Net income) to total

asset multiplied by 100(PAT/TA x 100).

This study adopts the second method which

gives a better explanation of what is due to the

shareholder’s of the company.

RCP: Means receivable collection period i.e.

average number of days from the sale of goods to

collection of resulting receivables. It is computed as

[Account Receivables/Sales]*365days (Manyo,

2013). ICP: Means Inventory Conversion Period

i.e. average number of days needed to convert

goods. It is computed as [Inventory/cost of goods

sold]*365days (Deloof, 2003).

Size:Firm’s size. It is one of the control

variables having no linkage with working capital

management but frequently used as independent

variable in similar studies. It is computed as natural

logarithm of total assets.

Growth: Firm’s growth (in sales). It is also

one of the control variables having no linkage with

working capital management but frequently used as

independent variable in similar studies. It is

computed as: [Salest2 –Salest1] ÷ Salest1. α1=is

constant, βi1-4=coefficient of variables 1 to 4, and

Li=residual term.

RESULTS AND DISCUSSION

Table 4 presents the descriptive statistics

results for the dependent and independent variables

of the study.


83

Table 1. Descriptive Statistics of Dependent and

Independent Variables

Variabl

es

N Min Max Mean Std

Dev.

ROA 10

0

-

1.31

0.72 0.0961 0.19264

71

RCP 10

0

2.17 1352.

58

53.575 143.169

6

ICP 10

0

30.2

9

604.7

4

92.7596 70.0452

3

Growt

h

10

0

-1.0 3.34 0.18373

74

0.52954

85

Size 10

0

19.6

1

26.58 24.0079 1.46663

6

Source: Stata version 13 Output

The descriptive statistics for 10 Nigerian food

and beverage companies for a period of ten (10)

years from 2005-2014 and for a total 100 firms year

observations. The mean value of ROA is 9.61% of

total assets. This implies that on the average for

each N100 invested in Assets N9.61 was the profit

earned. The standard deviation is 19.265%,

implying that the value of profitability can deviate

from mean to both sides by 19.265%.The maximum

value for the ROA is 72% while the minimum is -

131% for the industry under consideration.

Receivable collection period (RCP) has overall

mean of 53 days with a maximum of 3 years and

minimum of 2 days. This means that on the

average, the listed food and beverage companies in

Nigeria do not extend credit to their customers

beyond 53days. On the average, food and beverage

companies listed on NSE take 92 days

(approximately 3 months) to convert their

inventories into sales with a standard deviation of

70 days. The maximum time needed to do so is 604

days (approximately 20 months) while the

minimum is 30 days.

Table 2. Results of Normality Test

Varia

bles

O

bs

Pr(Skew

ness)

Pr(Kurt

osis)

Adj

chi2

(2)

Prob>

chi2

ROA 10

0

0.0000 0.0000 - 0.0000

RCP 10

0

0.0000 0.0000 - 0.0000

ICP 10

0

0.0000 0.0000 - 0.0000

Size 10

0

0.0011 0.1901 10.5

8

0.0051

Grow

th

10

0

0.0000 0.0000 61.1

5

0.0000

Source: Stata version 13 output

The variables of the study are subjected to

test for data normality; the essence is to find out if

the variables came from a normally distributed

population. Table 2 indicates that the data for all

the variables are normally distributed, because the

p-values are significant at 5% level of significance

(ROA, RCP, ICP, from prob> chi2 values of

0.0000, 0.0000 and 0.0000) respectively) .Thus, this

clearly shows that the data are normally distributed.

Table 3. Series Correlation (Multicollinearity Test)

Npat

loss

Roa Rcp icp cpp Gro

wth

NPAT

/loss

1

ROA 0.342

2

1

RCP -

0.255

8

-

0.06

03

1

ICP -

0.096

8

-

0.11

95

0.09

9

1

CPP -

0.204

6

-

0.31

48

0.48

46

0.26

02

1

Growt

h

-

0.076

6

-

0.01

03

-

0.04

63

0.03

47

-

0.03

78

1

Cr -

0.059

6

0.07

17

0.04

26

-

0.09

83

-

0.15

94

-

0.11

01

Source: Stata version 13 output

Table 3 presents the correlation results

between working capital management variables

(Receivable Collection Period and Inventory

Conversion Period) and profitability (ROA) of the

listed food and beverage companies in Nigeria. The

table shows that there is a significant negative

relationship between profitability (ROA) and


84

receivable collection period (RCP) policy from the

correlation coefficient of -0.2558.This result

suggests that the more receivable collection period

remain outstanding in the sampled of the listed

food and beverage companies, organizational

profitability decreases. This finding is consistent

with prior studies including that of Padachi (2006),

Solano (2007), Mathuva (2010), and Naponpech

(2012), Deloof (2003), Brigham and Houston

(2003) who stress the need of reducing the

receivable collection period in order to enhance

profitability.

More so, the result from table 3 indicates that

there is a negative relationship between profitability

(ROA) and inventory conversion period (ICP) from

the correlation coefficient of -0.0968.This implies

that the profitability of listed food and beverage

companies in Nigeria decreases with longer

inventory conversion period. The finding is in line

with the findings of Makori and Jagongo (2013),

Teruel and Solano (2007), Naponpech (2012),

Raheman and Nasr (2007).

Test of Hypotheses

This section presents the inferential statistics

of collected data purposely to enable inferences to

be made from the data. Null Hypotheses are stated

followed by the results of the test presented in

tabular form and discussions thereafter.

Table 4. Random Effects GLS Regression Results

(ROA as a Measure of Profitability)

ROA Coefficient Z P>/Z/ Std Error

CCC 0.0101011 4.39 0.000** 0.0023013

RCP -0.0027973 -

0.67

0.503 0.0041795

ICP -0.0215119 -

2.61

0.009** 0.0082385

CR 3.0058 2.30 0.021** 1.304789

CONS 19.02524 9.62 0.000** 1.977176

*** Significant at 1%, **Significant at 5%,

*Significant at 10%

Source: Stata version 13 Output

Hypothesis One

There is no significant relationship between

receivable collection period (RCP) policy and profitability

of the listed food and beverage companies in Nigeria.

To test whether to accept or reject the null

hypothesis, Table 4 is used as reference. RCP is

observed to have a negative impact (-0.0027973) on

profitability (ROA). The associated p value is

shown to be greater than the significance level

(0.503 > 0.05), therefore, the null hypothesis is

accepted, implying that RCP policy has no

statistically significant relationship on profitability

of the listed food and beverage companies in

Nigeria for the period of 10 years under

consideration. Though a negative relationship is

said to be established between RCP policy and


companies in Nigeria, it is not a major factor to be

considered in taking decision in respect to

organizational profitability.

Hypothesis Two

Inventory conversion period (ICP) Policy has no

significant relationship on the profitability of the listed

food and beverage companies in Nigeria.

In reference to Table 4, there exists a

negative relationship (-0.0215119) between

inventory conversion period (ICP) policy and

profitability (ROA) of the listed food and beverage

companies in Nigeria over the covered period. This

is an indication that when inventory stays long

before being sold (ICP), it leads to tied down cash

which could be used for the day to day running of

the business, therefore, reducing the profitability of

these companies and vice versa. To test the

hypothesis postulated above, Table 4 is also put in

use. The result of the regression indicates that ICP

policy has a z value of -2.61 and a p value of 0.009.

Since p value (0.009) is < 0.05, the null hypothesis

is rejected, showing that inventory conversion

period policy has a significant relationship on the


companies in Nigeria; hence, ICP policy is

statistically significant. This implies that when

inventories stay longer before being sold (ICP), it

leads to tied down cash which could be used for the

day to day running of the business and hence

reduces the organizational profitability of these

companies for the 10 years period under

consideration. Therefore; this study infers that there

is significant relationship between inventory

conversion period (ICP) Policy and profitability of

the listed food and beverage companies in Nigeria.


85

By implication, ICP policy has a major role to play

in determining the organizational profitability of

listed food and beverage companies in Nigeria.

CONCLUSIONS

Based on the findings of the study, the

following conclusions are drawn for the listed food

and beverage companies in Nigeria. Specifically,

the study concludes that: There is no significant

relationship between receivable collection period

(RCP) policy and profitability of the listed food and

beverage companies in Nigeria. Conclusively, RCP

policy is not a major factor to be considered by the

management or managers of the listed food and

beverage companies in Nigeria in boosting their

profitability. In essence, other working capital

management components other than RCP policy

should be given more priority to improve on

organizational profitability.

There is a significant negative relationship

between inventory conversion period (ICP) policy

and profitability of the listed food and beverage

companies in Nigeria. Therefore, it can be

concluded that negative ICP policy impact greatly

to the organizational profitability of the listed food

and beverage companies in Nigeria. Hence, more

attention needs to be given to negative ICP policy

as this would reduce cost and maximizes


companies in Nigeria. However, any policy of

inventory control that would deviate from this

should be discouraged categorically.

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